What Is Social Security?

Social Security is the term used for the Old-Age, Survivors, and Disability Insurance (OASDI) program in the United States, run by the Social Security Administration (SSA), which is a federal agency. While best known for retirement benefits, it also provides survivor benefits and disability income. It is independent of a lump-sum pension.

Key Takeaways

  • To qualify for Social Security retirement benefits, workers must be at least 62 and have paid into the system for 10 years or more.
  • Workers who wait to collect Social Security, up to age 70, will receive higher monthly benefits.
  • Spouses and ex-spouses may also be eligible for benefits based on their former partner’s earnings record.

How Social Security Works

Social Security is an insurance program. Workers pay into the program, typically through payroll withholding where they work. They can earn up to four credits each year.

For 2020, every time someone earns $1,410, he or she receives one credit until hitting $5,640, or four credits. That money goes into two Social Security trust funds—the OASI Trust Fund for retirees and the DI Trust Fund for disability beneficiaries—where it is used to pay benefits to people currently eligible for them. The money that is not spent remains in the trust funds.

A Board of Trustees oversees the financial operation of the two Social Security trust funds. Four of the six members are the secretaries of the departments of Treasury, Labor, and Health and Human Services, and the Commissioner of Social Security, while the remaining two members are public representatives appointed by the president and confirmed by the Senate.

Medicare, the federal health insurance program for Americans 65 and older and some people with disabilities, is also supported through payroll withholding, but that money goes into a third trust fund, managed by the Centers for Medicare & Medicaid Services.

Retirement Benefits

Workers who have paid into the Social Security system for at least 10 years become eligible for early retirement benefits at age 62. However, they will receive a higher monthly benefit if they wait until their “full retirement age”—66 for people born in 1954, then add two months for each year until reaching 1960, at which point 67 becomes the new full retirement age for all—and an even higher one if they wait as late as age 70, at which point their benefit maxes out.  Workers can get a projection of their benefits at different retirement ages by using the Retirement Estimator on the SSA website.

Workers’ Social Security benefits are computed based on their average indexed monthly earnings (AIME) during their 35 highest-earning years. Spouses can also claim benefits, based on either their own earnings record or their spouse’s. A divorced spouse who is not currently married can receive benefits based on an ex-spouse’s earnings record if the marriage lasted at least 10 years. Children of retirees can also receive benefits until they turn 18 (longer if the child is disabled or a student). The cutoff is 16 if you are caring for a child not your own.

Social Security not only provides benefits to many retirees but also to their children and survivors—and to workers who become disabled (and their children and survivors).

Disability Benefits

People who can’t work due to a physical or mental disability that is expected to last for a year or more—or result in death—may be eligible for Social Security disability benefits. To qualify, you generally have to meet certain earnings tests. Family members of disabled workers can also be eligible.

Survivors Benefits

The spouse and children of a deceased worker may be eligible for survivor benefits based on the worker’s earnings record. That includes surviving spouses who are 60 or older, or 50 or older and disabled, provided they have not remarried. A surviving spouse who is caring for a child who is younger than 16 or is disabled may be eligible for these benefits too.

For children to receive benefits, they must generally be younger than 18 or disabled. Under certain circumstances a stepchild, grandchild, step-grandchild, or adopted child may also qualify for benefits.

Parents age 62 or older who were dependent upon a deceased worker for at least half of their income may also be able to collect benefits. In some circumstances surviving spouses and minor children are also entitled to a one-time payment of $255 after an eligible worker’s death.

History of Social Security

The Social Security system in the U.S. was born on Aug. 14, 1935, when President Franklin D. Roosevelt signed the Social Security Act into law. The first monthly benefits checks became payable on Jan. 1, 1940, and the first person to collect one was Ida M. Fuller, a retired legal secretary in Vermont. Her check was for $22.54.

The system and its rules have evolved in the decades since. Today Social Security is one of the largest government programs in the world, paying out hundreds of billions of dollars each year. In 2020 the Social Security Administration says about 178 million people pay Social Security taxes, while about 64 million receive monthly Social Security benefits.

With the aging of the U.S. population, some observers have raised concerns about the viability of a system in which fewer active workers will be supporting greater numbers of retirees. In their 2020 report, the OASDI trustees project that the retirement fund’s reserves would become depleted in 2035, as the youngest baby boomers begin to collect Social Security. The trustees forecast the retirement trust fund will dry up in 2034 and the disability trust fund in 2065.

When the reserves for each fund are depleted, the taxes coming in from active workers will be enough to pay about 76% of the benefits to retirees and 92% of the benefits to disability beneficiaries. If that prediction holds, Congress will need to find ways to plug the gap, which might mean higher taxes on workers, lower benefits, higher age requirements for retirees, or some combination of these elements.